1. What is an Investment?

An investment is an asset or item acquired with the goal of generating income or appreciation. In an
economic sense, an investment is the purchase of goods that are not consumed today but are used in the
future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the
asset will provide income in the future or will later be sold at a higher price for a profit.

2. Basic Investment Objectives

 Safety
 Income
 Capital Growth
 Tax Minimization
 Marketability/Liquidity

Safety
There is truth to the axiom that there is no such thing as a completely safe and secure investment.
However, we can get close to ultimate safety for our investment funds through the purchase of
government-issued securities in stable economic systems or through the purchase of corporate bonds
issued by large, stable companies. Such securities are arguably the best means of preserving principal
while receiving a specified rate of return.

Income
To increase their rate of investment return and take on risk above that of money market instruments or
government bonds, investors may choose to purchase corporate bonds or preferred shares with lower
investment ratings

Capital Growth
This discussion has thus far been concerned only with safety and yield as investment objectives and has
not considered the potential of other assets to provide a rate of return from an increase in value, often
referred to as a capital gain.

Tax Minimization
An investor may pursue certain investments to leverage tax minimization as part of their investment
strategy. A highly paid executive, for example, may seek investments with favourable tax treatment to
lessen his or her overall income tax burden. Making contributions to an IRA or another tax-sheltered
retirement plan, such as a 401(k), can be an effective tax minimization strategy.

Marketability/Liquidity
Many of the investments we have discussed are reasonably illiquid, which means they cannot be
immediately sold and easily converted into cash. Achieving a degree of liquidity, however, requires the
sacrifice of a certain level of income or potential for capital gains.

3. Essential features of an Investment

Safety of principal
Safety of funds invested is one of the essential ingredients of a good investment programme. Safety of
principal signifies protection against any possible loss under the changing conditions. Safety of principal
can be achieved through a careful review of economic and industrial trends before choosing the type of
investment. It is clear that no one can make a forecast of future economic conditions with utmost
precision. To safeguard against certain errors that may creep in while making an investment decision,
extensive diversification is suggested.

Liquidity and Collateral value

A liquid investment is one which can be converted into cash immediately without monetary loss. Liquid
investments help investors meet emergencies. Stocks are easily marketable only when they provide
 adequate return through dividends and capital appreciation. Portfolio of liquid investments enables the
investors to raise funds through the sale of liquid securities or borrowing by offering them as collateral
security. The investor invests in high grade and readily saleable investments in order to ensure their
liquidity and collateral value.

Stable income
Investors invest their funds in such assets that provide stable income. Regularity of income is consistent
with a good investment programme. The income should not only be stable but also adequate as well.

Capital growth
One of the important principles of investment is capital appreciation. A company flourishes when the
industry to which it belongs is sound. So, the investors, by recognizing the connection between industry
growth and capital appreciation should invest in growth stocks. In short, right issue in the right industry
should be bought at the right time.

Tax implications
While planning an investment programme, the tax implications related to it must be seriously
considered. In particular, the amount of income an investment provides and the burden of income tax
on that income should be given a serious thought. Investors in small income brackets intend to
maximize the cash returns on their investments and hence they are hesitant to take excessive risks. On
the contrary, investors who are not particular about cash income do not consider tax implications
seriously.

Stability of Purchasing Power

Investment is the employment of funds with the objective of earning income or capital appreciation. In
other words, current funds are sacrificed with the aim of receiving larger amounts of future funds. So,
the investor should consider the purchasing power of future funds. In order to maintain the stability of
purchasing power, the investor should analyze the expected price level inflation and the possibilities of
gains and losses in the investment available to them.

Legality
The investor should invest only in such assets which are approved by law. Illegal securities will land the
investor in trouble. Apart from being satisfied with the legality of investment, the investor should be
free from management of securities. In case of investments in Unit Trust of India and mutual funds of
Life Insurance Corporation, the management of funds is left to the care of a competent body. It will
diversify the pooled funds according to the principles of safety, liquidity and stability.

4. Investment Process:
Investment Policy
The first stage determines and involves personal financial affairs and objectives before making
investments. It may also be called preparation of the investment policy stage. The investor has to see
that he should be able to create an emergency fund, an element of liquidity and quick convertibility of
securities into cash. This stage may, therefore; be considered appropriate for identifying investment
assets and considering the various features of investments.

Investment Analysis:
When an individual has arranged a logical order of the types of investments that he requires on his
portfolio, the next step is to analyse the securities available for investment. He must make a
comparative analysis of the type of industry, kind of security and fixed vs. variable securities. The
primary concerns at this stage would be to form beliefs regarding future behaviour or prices and stocks,
the expected returns and associated risk.

Valuation of Securities:
 The third step is perhaps the most important consideration of the valuation of investments. Investment
value, in general, is taken to be the present worth to the owners of future benefits from investments.
The investor
has to bear in
mind the value
of these
investments.

An appropriate
set of weights
have to be
applied with
the use of
forecasted
benefits to
estimate the
value of the
investment assets. Comparison of the value with the current market price of the asset allows a
determination of the relative attractiveness of the asset. Each asset must be valued on its individual
merit. Finally, the portfolio should be constructed.

Portfolio Construction:
Under features of an investment programme, portfolio construction requires knowledge of the different
aspects of securities. These are briefly recapitulated here, consisting of safety and growth of principal,
liquidity of assets after taking into account the stage involving investment timing, selection of
investment, and allocation of savings to different investments and feedback of portfolio.
While evaluating securities, the investor should realize that investments are made under conditions of
uncertainty. These cannot be a magic formula which will always work. The investor should be concerned
with concepts and applications that will satisfy his investment objectives and constantly evaluate the
performance of his investments. If need be, the investor may consider switching over to alternate
proposals.

5. Investment vs. Speculation Vs. Gambling

Investment
The act of committing money or capital to an endeavour with the expectation of obtaining an additional
income or profit – There has to be a reasonable expectation of profit.
Speculation
The act of trading in an asset or conducting a financial transaction that has a significant risk of losing
most or all of the initial outlay, in expectation of a substantial gain – With speculation, the risk of loss is
more than offset by the possibility of a huge gain; otherwise, there would be very little motivation to
speculate
Gambling
Gambling is defined as staking something on a contingency – The rewards are not in line with the risks

6. Investment Avenues:
7. Risk and Retun Trade-off concept